Geographies

Karthik Ramanna

Effective September 2016, Karthik Ramanna is Professor of Business & Public Policy and Director of the Master of Public Policy Programme at the University of Oxford’s Blavatnik School of Government.

Karthik joins Oxford after nearly a decade on the faculty of Harvard Business School. At Harvard, he also held the Henry B. Arthur Fellowship in ethics, the Marvin Bower Fellowship recognizing innovative faculty research, and a visiting fellowship at the Kennedy School of Government. Additionally, he is a faculty associate of the Weatherhead Center for International Affairs.

Karthik’s scholarship explores the role of business leadership in shaping the basic rules that govern capital-market societies. His book Political Standards (University of Chicago Press) studies the political and economic forces that have shaped corporate financial reporting standards over the last 30 years. He argues that accounting rulemaking is an allegory for the “thin political markets” where businesses shape – and sometimes subvert – the essential technical edifices of our economy.

At Harvard, Karthik taught the required MBA course Leadership & Corporate Accountability, where he helped build a curriculum to develop leaders who can confront the 21st century’s most challenging problems, including institutional corruption and income inequality. He has also taught accounting, finance, and general management to graduate students and senior executives.

Karthik has authored over two-dozen HBS case materials and over a dozen original research articles in leading professional outlets such as the Accounting Review, the California Management Review, and the Harvard Business Review. His scholarship has won awards from numerous bodies such as the American Accounting Association. Karthik serves on the editorial boards of several scientific journals, including as co-editor of the interdisciplinary journal Accounting, Economics & Law and as associate editor of the Journal of Accounting & Economics, the most-cited outlet in that field.

To more directly impact business policy, Karthik occasionally writes for the popular press, including the New York Times and the Economic Times. He has also consulted with the Brookings Institution, the Center for Audit Quality, and several leading auditing and financial firms.

Karthik received his Ph.D. in management from the Massachusetts Institute of Technology. He is an American citizen.

There are certain institutions underlying our modern market-capitalist system that are largely outside the interest and understanding of the general public—e.g., rulemaking for bank capital adequacy, actuarial standards, accounting standards, and auditing practice. In these areas, corporate managers and financial experts such as auditors and bankers possess the technical expertise necessary for informed regulation, enjoy strong economic interests in the outcome, and face little resistance to their lobbying activities from the general public. These areas are known as "thin political markets" to distinguish them from more vibrant and competitive "thick" political processes (e.g., healthcare regulation). This book develops the notion of thin political markets through a vivid exploration of the political processes determining our system of accounting rules upon which depends our ability to reliably measure corporate profits in the economy. The book shows how some corporate interests, in the spirit of increasing profits, have been manipulating the very definition of profit by changing accounting rules. On one level, this corporate behavior embodies the capitalist spirit articulated by Milton Friedman: "The social responsibility of business is to increase its profits." But the ethics of profit-increasing behavior are premised on the logic of competition, and this logic breaks down in thin political markets. The result is a structural flaw in the determination of critical institutions of our capitalist system, which, if ignored, can undermine the legitimacy of the system. The book closes with ideas on how to fix the problem.

I study the evolution of SFAS 142, which uses unverifiable fair-value estimates to account for acquired goodwill. I find evidence consistent with the FASB issuing SFAS 142 in response to political pressure over its proposal to abolish pooling accounting. The result is interesting given this proposal was due in part to SEC concerns over pooling misuse. I also find evidence consistent with lobbying support for SFAS 142 increasing in firms' discretion under the standard. Agency theory predicts such unverifiable discretion can be used opportunistically.

We examine the accrual choices of outsourcing firms with links to U.S. congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically connected firms with more extensive outsourcing activities have more income-decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms' concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.

Based on extant literature, we review the positive theory of GAAP. The theory predicts that GAAP's principal focus is on control (performance measurement and stewardship) and that verifiability and conservatism are critical features of a GAAP shaped by market forces. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally. We conclude that rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB would allow GAAP to better respond to market forces.

SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted managers will, on average, use the fair value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management's future actions (including managers' conceptualization and implementation of firm strategy). Thus, agency theory predicts managers will, on average, use the discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory derived predictions, does not confirm the private information hypothesis.

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of some international political dynamics of countries' IFRS harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize the jurisdictions' IFRS responses: proximity to existing political powers at the IASB and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

Ramanna, Karthik. "The International Politics of IFRS Harmonization."Accounting, Economics and Law 3, no. 2 (April 2013): 1–46. (Published in a dedicated issue of the journal together with four discussions, including two by the chairpersons of the national accounting standards bodies of France and Japan.) View Details

This paper provides an accounting-based conceptual framing of the phenomenon of corporate accountability reporting. Such reporting is seen as arising from a delegator's (e.g., a citizenry) demand to hold a delegate (e.g., shareholders) to account. When effective, corporate accountability reporting can internalize certain externalities into firms' resource-allocation decisions, although doing so will not always serve shareholders' interests. I leverage the positive accounting literature's current understanding of properties of financial reports to develop three hypotheses on corporate accountability reporting. I argue that an accountability reporting system is likely to be more useful to a delegator if it (1) mitigates information advantages across delegates and delegators, (2) reports both stocks and flows in the measures of account, and (3) has a mutually agreeable due process to match across periods the actions of delegates and the outcomes of those actions. I show how the successive incidence of these properties in observed corporate accountability reports can be used to determine whether and how those reports create or destroy value for shareholders and other constituencies.

We investigate the effect of standard setters in standard setting: we examine how certain professional and political characteristics of FASB members and SEC commissioners predict the accounting "reliability" and "relevance" of proposed standards. Notably, we find FASB members with backgrounds in financial services are more likely to propose standards that decrease "reliability" and increase "relevance," partly due to their tendency to propose fair-value methods. We find opposite results for FASB members affiliated with the Democratic Party, although only when excluding a financial-services background as an independent variable. Jackknife procedures show that results are robust to omitting any individual standard setter.

If the differences in accounting standards across countries reflect relatively stable institutional differences (e.g., auditing technology, the rule of law, etc.), why did several countries rapidly, albeit in a staggered manner, adopt IFRS over local standards in the 2003–2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of countries' shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users increase and contribute significantly towards the country's decision to adopt IFRS. We find that perceived network benefits increase the degree of IFRS harmonization among countries, and that smaller countries have a differentially higher response to these benefits. Further, economic ties with the European Union are a particularly important source of network effects. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption was self-reinforcing during the sample period, which, in turn, has implications for the consequences of IFRS adoption.

In a capitalist system based on free markets, do managers have responsibilities to the system itself? If they do, should these responsibilities shape their behavior when they engage in the political processes that structure the institutions of capitalism? The prevailing view—perhaps most eloquently argued by Milton Friedman—is that the first duty of managers is to maximize shareholder value and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We argue here that this shareholder-return view of political engagement may apply in cases where the political process is sufficiently "thick," in that sufficiently detailed information about the issues is widely available and the public interest is well-represented. However, we draw on a series of detailed examples in the context of the determination of corporate accounting standards to argue that when the political process of determining the institutions of capitalism is "thin," in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political resistance from the general interest, then managers have a responsibility to market institutions themselves, even if this entails acting at the expense of corporate profits. We make this argument on grounds that this behavior is both in managers' long-run self-interest and, expanding on Friedman's core contention, that it is managers' moral duty.

"Thin political markets" are the processes through which some of the most complex and critical institutions of our capitalist system are determined—e.g., our accounting-standards infrastructure. In thin political markets, corporate managers are largely unopposed—because of their own expertise and the general public's low awareness of the issues. This enables managers to structure the "rules of the game" in self-serving ways. The result is a structural flaw in the determination of critical institutions of our capitalist system, which, if ignored, can undermine the legitimacy of the system. I provide some ideas on how to fix the problem.

The legitimacy of market capitalism rests on its ability to deliver freedom, prosperity, and growth in a manner that is efficient and fair. The pursuit of profit is a central but not the only element of capitalism. There are many circumstances, such as when lobbying the government for technical regulations or when confronted with opportunities to obtain public licences through corrupt means, when businesspersons may have to suspend the short-term profit motive and assume a more benevolent, stewardship role toward the system and society. It is their capacity and good judgment to identify and act on these circumstances that will transform them from being simply profiteers to true business leaders, and will forestall the heavy-handed political response that might destroy the very system from which so many benefit.

Corruption is the greatest impediment to conducting business in Russia, according to leaders recently surveyed by the World Economic Forum. Indeed, it's a problem in many emerging markets, and businesses have a role to play in combating it, according to Healy and Ramanna. The authors focus on RosPil—an anticorruption entity in Russia set up by Alexey Navalny, a crusader against public and private malfeasance in that country. As of December 2011, RosPil claimed to have prevented the granting of dubious contracts worth US$1.3 billion. The organization holds corrupt politicians' and bureaucrats' feet to the fire largely through internet-based crowdsourcing, whereby often-anonymous people identify requests for government-issued tenders that are designed to generate kickbacks. Should entities like RosPil be supported, and should companies fashion their own responses to corruption? On the one hand, there are obvious public-relations and political risks; on the other hand, corruption can erode a firm's competitiveness, the trust of customers and employees, and even the very legitimacy of capitalism. The authors argue that heads of many multinational companies are well positioned to combat corruption in emerging markets. Those leaders have the power to enforce policies in their organizations and networks, and they enjoy the ability to organize others in the industry against this pernicious threat.

For the past two decades, fair-value accounting—the practice of measuring assets and liabilities at estimates of their current values—has been on the ascent. This marks a major departure from the centuries-old tradition of keeping books at historical cost. It also has implications across the world of business, because the accounting basis—whether fair value or historical cost—affects investment choices and management decisions, with consequences for aggregate economic activity. This article discusses the role of investment banking and investment management industry veterans on the Financial Accounting Standards Board in the growth of fair-value accounting. It raises the possibility of special-interest capture of accounting regulation by segments of the financial-services industry.

We examine how Big N auditors' changing incentives impact their comment-letter lobbying on U.S. GAAP over the first thirty-four years of the FASB (1973–2006). We examine the influence of auditors' lobbying incentives arising from three basic factors: managing expected litigation and regulatory costs; catering to clients' preferences for flexibility in GAAP; and being conceptually aligned with the FASB, particularly on the use of fair values in accounting. We find evidence that auditor lobbying is driven by prevailing standards of litigation and regulatory scrutiny and by support for fair-value accounting. But we find no evidence that catering to clients' preferences for flexibility in GAAP drives auditor lobbying. Broadly, our paper offers the first large-sample descriptive analysis of the role of Big N auditors in the accounting standard-setting process.

Prior literature raises a "puzzle" of high rates of return on corporate political investment, but evidence for this puzzle is largely descriptive in nature. We exploit the setting of the American Jobs Creation Act's passage in 2004 to provide more robust estimates of political returns based on instrumentation in a two-stage regression model. We find for the median sample firm that an increase of $1 million in lobbying spending is associated with about $32.35 million in taxes saved. These estimates, while consistent with a high-returns "puzzle," are nearly an order of magnitude lower than those previously reported via descriptive methods.

The local government in Delhi has ordered a ban on Nestlé's flagship product in India—Maggi Noodles, citing excessive lead content per government lab tests. Nestlé disputes the government tests, noting that internal and third-party tests show the product to be safe. There is considerable confusion in the media and amongst Nestlé's customers, and Maggi sales begin to plummet. Other local governments and India's federal food-safety regulator also consider bans. Nestlé must decide how to respond—options include suing the regulators and withdrawing the product, which could impact up to 25% of Nestlé's India sales.

The local government in Delhi has ordered a ban on Nestlé's flagship product in India—Maggi Noodles, citing excessive lead content per government lab tests. Nestlé disputes the government tests, noting that internal and third-party tests show the product to be safe. There is considerable confusion in the media and amongst Nestlé's customers, and Maggi sales begin to plummet. Other local governments and India's federal food-safety regulator also consider bans. Nestlé must decide how to respond—options include suing the regulators and withdrawing the product, which could impact up to 25% of Nestlé's India sales.

The local government in Delhi has ordered a ban on Nestlé's flagship product in India—Maggi Noodles—citing excessive lead content per government lab tests. Nestlé disputes the government tests, noting that internal and third-party tests show the product to be safe. There is considerable confusion in the media and among Nestlé's customers, and Maggi sales begin to plummet. Other local governments and India's federal food-safety regulator also consider bans. Nestlé must decide how to respond. Options include suing the regulators and withdrawing the product, which could impact up to 25% of Nestlé's India sales.

A Swedish newspaper reveals that IKEA has erased all images of women from its catalog for Saudi Arabia. The article sparks criticism of IKEA from the Swedish government and its customers in the West. Critics contend that IKEA is not living up to its own commitments to gender equality. Some threaten a boycott. IKEA must respond. Reissuing the catalog with women included risks running afoul of Saudi censors who can impose harsh penalties. The company has had a presence in Saudi Arabia for nearly 30 years.

Loan officer Jim Teague discovers his agro-processor client has a serious health-code violation just days before a disbursement is due. Proceeding with the loan could jeopardize the health of thousands of customers and put his employer at serious risk. But withholding the loan will likely deprive hundreds of farmers affiliated with the agro-processor their livelihoods in this poor rural corner of Tanzania.

This module note on business-government relations introduces students to the state of campaign contributions and lobbying by corporations in the United States. The note develops two hypotheses as to the impact of corporate political engagement: (i) a vehicle to facilitate good government; and (ii) an instrument of special-interest capture. The note can be used to generate a discussion on the following issues: (1) In a democratic capitalist society, what is the appropriate role of business in government? (2) When it comes to political contributions, should corporations have the same rights and responsibilities as individuals? The note also describes the various practical choices businesses face on political engagement, including disclosure options and options to engage through trade or ideological associations. This description can be used to encourage business students to develop an aspiration for their companies' political engagement strategies.

Explores the decision faced by AIG's board on whether to join shareholder and ex-CEO Maurice Greenberg's lawsuit against the U.S. government. The suit, argued by super-lawyer David Boies (of Bush v. Gore and California Gay Marriage fame), claims that in September 2008 the U.S. arbitrarily set aside the rights of AIG's shareholders—violating the Fifth Amendment by taking private property without just compensation—while preserving shareholder rights in other troubled financial institutions, including Goldman Sachs whose ex-CEO was the then Treasury Secretary. The U.S. government moved to dismiss the case arguing that it has wide discretion in times of crisis, but a federal judge allowed the suit to proceed. The case raises two issues central to understanding capitalism: (1) the importance of and limits to property rights; and (2) the role of the state in choosing between varieties of capitalism, here between oligarchic and entrepreneurial capitalism.

Explores the decision faced by AIG's board on whether to join shareholder and ex-CEO Maurice Greenberg's lawsuit against the U.S. government. The suit, argued by super-lawyer David Boies (of Bush v. Gore and California Gay Marriage fame), claims that in September 2008 the U.S. arbitrarily set aside the rights of AIG's shareholders—violating the Fifth Amendment by taking private property without just compensation—while preserving shareholder rights in other troubled financial institutions, including Goldman Sachs whose ex-CEO was the then Treasury Secretary. The U.S. government moved to dismiss the case arguing that it has wide discretion in times of crisis, but a federal judge allowed the suit to proceed. The case raises two issues central to understanding capitalism: (1) the importance of and limits to property rights; and (2) the role of the state in choosing between varieties of capitalism, here between oligarchic and entrepreneurial capitalism.

This note on business-government relations introduces students to the state of campaign contributions and lobbying by corporations in the United States. The note develops two hypotheses as to the impact of corporate political engagement: (i) a vehicle to facilitate good government; and (ii) an instrument of special-interest capture. The note can be used to generate a discussion on the following issues: (1) In a democratic capitalist society, what is the appropriate role of business in government? (2) When it comes to political contributions, should corporations have the same rights and responsibilities as individuals? The note also describes the various practical choices businesses face on political engagement, including disclosure options and options to engage through trade or ideological associations. This description can be used to encourage business students to develop an aspiration for their companies' political engagement strategies.

Ramanna, Karthik, and Sandra Sucher. "Business and Government: Campaign Contributions and Lobbying in the United States." Harvard Business School Teaching Note 113-138, June 2013. (Revised March 2015.) View Details

In late 2009, Wang Boming, publisher of Caijing Magazine, widely regarded as China's most independent newsmagazine, gathered his core team for an urgent meeting. His pioneering editor Hu Shuli, described for her fiercely independent journalism as "the most dangerous woman in China" had quit with two-thirds of Caijing's staff, allegedly over a conflict on editorial independence. Wang, known for his ability to navigate the country's carefully controlled propaganda apparatus, considered how to rebuild the magazine without its star editor.

In late 2009, Wang Boming, publisher of Caijing Magazine, widely regarded as China's most independent newsmagazine, gathered his core team for an urgent meeting. His pioneering editor Hu Shuli, described for her fiercely independent journalism as "the most dangerous woman in China" had quit with two-thirds of Caijing's staff, allegedly over a conflict on editorial independence. Wang, known for his ability to navigate the country's carefully controlled propaganda apparatus, considered how to rebuild the magazine without its star editor.

Cameron Trebbi is a senior executive overseeing accounting policy at a large global auditing firm. His role is to lobby the firm's position with various accounting rule-making bodies worldwide. The firm is close to acquiring as new audit clients a consortium of Chinese state-owned enterprises. The consortium has asked Trebbi's firm to seek an exception for state-owned enterprises on a proposed accounting rule. But Trebbi thinks such an exception is unsound accounting policy. He must decide how he will lobby, knowing that his testimony is highly valued by the accounting rule-making body and is likely to be unchallenged.

Set in 2010, the case discusses the strategic directions Hong Kong could pursue, particularly vis-a-vis China, as it seeks to preserve its preeminence in the region. In 2010, the Hong Kong Exchange announced that it would allow listed Chinese companies to report using Chinese GAAP without reconciliation to IFRS. The exchange was responding to the demands of its largely Chinese clientele and also coping with increased global competition to attract listings from Chinese companies. However, there were concerns around whether this change would undermine Hong Kong's position as a financial center in the long term. Hong Kong's position as a global financial powerhouse was due in part to its rigorous emphasis on compliance and enforcement; allowing companies to report under Chinese GAAP, the practice of which was highly variable, could compromise Hong Kong's high corporate governance standards.

Explores Canadian regulators' decision to adopt International Financial Reporting Standards (IFRS). The Canadian decision in 2005 to adopt IFRS is particularly interesting because Canada had well-developed domestic accounting standards and because a significant fraction of Canadian industry was lobbying for the adoption of U.S. Generally Accepted Accounting Principles (GAAP) and not IFRS. The case positions the student as an advisor to an important local politician. Based on cultural, economic, and political information available in 2005, the case requires the student to choose between (1) retaining Canadian GAAP, (2) adopting U.S. GAAP, or (3) adopting IFRS.

Peninsula Industries' U.S. country manager, Peter Lee, has a problem—his star hire, Dylan Pierce, is threatening to quit. Peninsula is a large Korean conglomerate multinational that has been keen to attract foreigners. Dylan was hired by Peter to work in Peninsula's U.S. operations. After 18 months, Dylan was promoted to company HQ in Seoul, to work with Peter's former boss. Dylan, who is gay and who thrived at Peninsula's California office, quickly runs afoul of the conservative culture at Peninsula's Korean HQ. Dylan's boss in Korea tells him he needs to be less "girly" if he wants to succeed at the company. Angered, humiliated, and confused, Dylan tells Peter he's ready to quit. Peter must respond.

Multimedia/video case on the SEC's work on improvements to financial reporting. Students review topical audio and video from various sources including SEC footage, and interviews with others involved, such as Bob Pozen, (past head of Fidelity and chairman of the SEC's advisory committee on financial reporting). After reviewing the case materials, students would be asked to put themselves in the shoes of Pozen, and make actionable recommendations on the future of fair-values accounting and principles-based accounting.

Anti-corruption web platform "ipaidabribe.com" leverages the transparency and anonymity of the Internet to encourage private citizens in India who have been the victims of corruption to self-report details of bribes paid, including the bribe amount, the name of the corrupt official, and services rendered. The ipaidabribe.com portal then aggregates these data to create maps and charts of corrupt activities across Indian cities. The theory is that such data will build awareness and shame, raising the cost of corruption. But after initial successes—buoyed by visibility generated from mass street protests against corruption in 2011—traffic to the website has slowed. The question before spouses, ex-bankers, and ipaidabribe.com co-founders Ramesh and Swati Ramanathan is how to generate and sustain interest in the web platform so that they have real impact on retail corruption in India. Possible solutions discussed include teaming up with local governments and police, focusing attention on one or two Indian cities, and franchising ipaidabribe.com internationally to create more visibility.

What are the major challenges to the continued growth of IFRS worldwide? Should countries be encouraged to pursue "full adoption" of IFRS or should each country determine its own IFRS "convergence" strategy? Given the limitations of governance and information-intermediation institutions worldwide, should IFRS limit the use of fair-value accounting? How should the IASB respond to the growing power of emerging markets such as China in international standard setting? What lessons can be learned from the growth and development of IFRS for international harmonization of corporate governance standards more broadly? This case first describes the IASB's major accomplishments over the 2001-2010 period and then outlines the major challenges to the continued growth of IFRS as it enters its second decade.

In late 2012, IASB chair Hans Hoogervorst, just over a year into his term, must address several serious geopolitical challenges that can derail IFRS growth. The SEC has issued a report outlining why the U.S. should not adopt IFRS. Other major economies such as Japan and India begin to dither on IFRS as well. The EU—the IASB's main backer—is embroiled in a debt crisis that divides it; Britain—the strongest voice for IFRS in the EU—flirts with an EU exit. And China remains silent. Adding to these issues are longstanding concerns about the IASB's legal status and its finances. How can Hoogervorst return momentum to IFRS?

In 2005, China announced plans to "converge with," but not completely adopt, IFRS. China also began to lobby for changes to specific IFRS provisions, such as for related party disclosures by state-owned firms, to bring them more into line with Chinese interests. China's accounting system had already undergone significant reforms during the two decades when its economy had grown to become the fourth largest in the world. However, enforcement of accounting standards remained weak, the financial system was relatively immature, and large state-owned firms still dominated many sectors of the economy.

The case describes the challenges faced by Tata Steel, India's largest private sector steel company, as it transitions from Indian GAAP to IFRS. It first describes those challenges in the context of the institutional voids that make IFRS adoption difficult in India. The case then focuses on how companies in emerging markets might represent their interests at the IASB, the standard setting body for IFRS.

Erin Jones' ridesharing startup in her mid-sized hometown is finally picking up. She's hoping to reach a sustainable scale so that she can sell to a large player such as Uber in a year. But suddenly, she hits political roadblocks—the local Democratic mayor, facing a tough reelection and urged by the local taxi association, calls for more regulation of her business. Erin's board urges her to actively back the opposition Republican candidate through direct PAC giving, a Super PAC, and indirect lobbying. Erin, a lifelong Democrat, is opposed to the Republican on a number of personal issues. She must decide whether and how to engage in this election.

The last thirty years have seen the widespread embrace of market capitalism as not only a highly efficient form of economic organization but also as one that best meets the diversity of human preferences. In large, complex societies, an increasing body of theoretical and empirical research suggests, however, that the existence of competitive markets rests on strong institutional foundations. This note explores the appropriate role for the general manager, if any, in sustaining these conditions for market capitalism.

Two lost decades later, capitalism in Japan embodies peculiar contradictions—preserving wealth and social stability in the face of declining economic power. Scant transparency in Japanese corporate practices plays an important role in this phenomenon. Sometimes justified as an embodiment of Japanese culture, the opacity of Japanese corporations is credited with empowering managers to make long-term business decisions that preserve employment and business relationships and maintain social harmony. But opacity also facilitates fraud and corruption, which erode investor confidence and stifle risk-taking. A flamboyant politician, Kotaro Tamura, attempts to raise public awareness around these tensions, but his provocative style earns him few friends in Japan's conservative political establishment.

Two lost decades later, capitalism in Japan embodies peculiar contradictions—preserving wealth and social stability in the face of declining economic power. Scant transparency in Japanese corporate practices plays an important role in this phenomenon. Sometimes justified as an embodiment of Japanese culture, the opacity of Japanese corporations is credited with empowering managers to make long-term business decisions that preserve employment and business relationships and maintain social harmony. But opacity also facilitates fraud and corruption, which erode investor confidence and stifle risk-taking. A flamboyant politician Kotaro Tamura attempts to raise public awareness around these tensions, but his provocative style earns him few friends in Japan's conservative political establishment.

Studies the role of Cisco in setting current U.S. accounting standards for acquisitions and goodwill. Students are asked to analyze an acquisition in the context of an ongoing political debate on mergers accounting.

Studies the role of Cisco in setting current US accounting standards for acquisitions and goodwill. Students are asked to analyze an acquisition in the context of an ongoing political debate on mergers accounting.

Financial Accounting Foundation chairman Jack Brennan is under pressure from private-company interests to set up a new body—the Private Company Council—to determine separate GAAP for private companies. PCC advocates—including the US Chamber of Commerce—argue that traditional US GAAP has too many disclosure and fair-value requirements that impose very high compliance costs on private companies. But there are influential players—including the Big Four auditors—who oppose creating the PCC. They argue that the compliance costs of traditional GAAP are the price of high-quality accounting standards. Balancing these powerful interests, Brennan must make a decision on the PCC; at stake is US GAAP's ability to facilitate capital allocation decisions in the economy.

Societies face many pressing challenges with serious implications for business leaders. These include pollution and climate change, poverty and income inequality, obesity and public health, and corruption and regulatory capture. This note presents a way of analyzing the economic, legal, and ethical implications of these challenges for business leaders, in their capacities as corporate fiduciaries and citizens. The note offers a unifying framework by organizing major contemporary societal challenges into four "tragedies of the commons" and by developing the notion of a "capitalist's contract" that can help students consider how they, as future business leaders, will respond to these tragedies.

What should business leaders do about corruption? In December 2011, four HBS alumni met to debate how to engage the unprecedented protests against Vladimir Putin's corrupt government, which had erupted in Russia in response to alleged fraud in the recent parliamentary elections. A notable figure in the protests was anti-corruption blogger Alexey Navalny. Navalny used publicly available requests for tender, "crowd-sourcing," and volunteer experts to discover, expose, and encourage prosecution of corrupt dealings by the Russian government. These efforts made Navalny a cause célèbre in Western media and a popular figure with Russia's tech-savvy population. But was Navalny the right figure for business leaders in Russia to organize around? What were the risks of getting involved with a politically volatile activist?

Tapestry Networks assembled industry leaders and their regulators in small, private meetings to build new frameworks for pressing regulatory challenges. Tapestry's motivating principle was to reimagine solutions to complex problems (e.g., drug-approval standards) in ways that created a win-win for firms and society. Tapestry meetings on bank-governance standards—initiated after the 2008–2009 Financial Crisis—had experienced some success in rebuilding trust between regulators and banks. But, five years on, the initiative faced important challenges. First, as the urgency of the Financial Crisis faded, it was becoming more difficult to show concrete successes, particularly to the meetings' sponsors—one participant described Tapestry as "sculpting fog." Second, participants differed on what they wanted to get out of the meetings—with some participants less focused on the meetings' broader social objectives. Third, Tapestry faced lingering questions about the meetings' legitimacy and whether they facilitated greater "coziness" between regulators and the regulated.

The case explores a new business venture to bring clean water to residents of Dar es Salaam, Tanzania, who otherwise cannot afford it. Management has enough money to get the company through August 2010 but needs more capital thereafter. An HBS alumnus is interested in investing in the company. Management needs to revisit its financial assumptions; decide on an incentive structure for its proposed network of local water vendors; and put together a pro-forma income statement, cashflow statement, and balance sheet in anticipation of meeting with the investor.

The case explores a new venture to bring clean water to Tanzanians who otherwise cannot access or afford it. Management has enough money to get their company through August 2010, but needs more capital. An HBS alum is interested in investing in the company; consequently management needs to revisit their early assumptions, decide on the incentive structure for water vendors in Tanzania, and put together a pro-forma income statement, cashflow statement, and balance sheet in anticipation of their meeting with the potential investor.

The case explores a new business venture to bring clean water to residents of Dar es Salaam, Tanzania, who otherwise cannot afford it. Management has enough money to get their company through August 2010, but needs more capital thereafter. An HBS alumnus is interested in investing in the company. Management needs to revisit their financial assumptions, decide on an incentive structure for their proposed network of local water vendors, and put together a pro-forma income statement, cashflow statement, and balance sheet in anticipation of their meeting with the investor.

In 2012, as part of a routine disclosure under U.S. law, Wal-Mart revealed it had spent $25 million since 2008 on lobbying to "enhance market access for investment in India." This disclosure, which came weeks after the Indian government made a controversial decision to permit FDI in the country's multi-brand retail sector, created uproar in India. Lobbying by multinationals drew strong emotions in India, evoking images of the millions spent by Enron in the 1990s to "educate Indians"—a suspected euphemism for bribery. Opposition political parties accused Wal-Mart of bribing the Indian government, which, on the eve of a general election, appointed a judicial commission to investigate Wal-Mart. Already under pressure from allegations of bribery in Mexico, Wal-Mart risked becoming embroiled in another embarrassing scandal. How had the company landed in its current situation and how could it respond to the investigation into its India-related lobbying?

In a capitalist system based on free markets, do managers have responsibilities to the system itself? If they do, should these responsibilities shape their behavior when they are engaging in the political process in an attempt to structure the institutions of capitalism? The prevailing view—perhaps most eloquently argued by Milton Friedman—is that the first duty of managers is to maximize shareholder value, and thus that they should take every opportunity (within the bounds of the law) to structure market institutions so as to increase profitability. We maintain here that this shareholder-return view of political engagement applies in cases where the political process is sufficiently 'thick,' in that diverse views are well-represented and sufficiently detailed information about the issues is widely available. However, we draw on a series of detailed examples in the context of the determination of corporate accounting standards to argue that when the political process of determining institutions of capitalism is 'thin,' in that managers find themselves with specialized technical knowledge unavailable to outsiders and with little political resistance from the general interest, then managers have a responsibility to market institutions themselves, even if this entails acting at the expense of corporate profits. We make this argument on grounds that this behavior is both in managers' long-run self-interest and, expanding on Friedman's core contention, that it is managers' moral duty. We provide a framework for future research to explore and develop these arguments.

We examine how the tightening of the U.S. auditing oligopoly over the last twenty-five years—from the Big 8 to the Big 6, the Big 5, and, then, the Big 4—has affected the incentives of the Big N, as manifest in their lobbying preferences on accounting standards. We find, as the oligopoly has tightened, Big N auditors are more likely to express concerns about decreased "reliability" in FASB-proposed accounting standards (relative to an independent benchmark); this finding is robust to controls for various alternative explanations. The results are consistent with the Big N auditors facing greater political and litigation costs attributable to their increased visibility from tightening oligopoly and with decreased competitive pressure among the Big N to satisfy client preferences (who, relative to auditors, favor accounting flexibility over reliability). The results are inconsistent with the claim that the Big N increasingly consider themselves "too big to fail" as the audit oligopoly tightens.

In a sample of 102 non-European Union countries, we study variations in the decision to adopt International Financial Reporting Standards (IFRS). There is evidence that more powerful countries are less likely to adopt IFRS, consistent with more powerful countries being less willing to surrender standard-setting authority to an international body. There is also evidence that the likelihood of IFRS adoption at first increases and then decreases in the quality of countries' domestic governance institutions, consistent with IFRS being adopted when governments are capable of timely decision making and when the opportunity and switching cost of domestic standards are relatively low. We do not find evidence that levels of and expected changes in foreign trade and investment flows in a country affect its adoption decision: thus, we cannot confirm that IFRS lowers information costs in more globalized economies. Consistent with the presence of network effects in IFRS adoption, we find that a country is more likely to adopt IFRS if other countries in its geographical region are IFRS adopters.

SFAS 142 requires firms to use unverifiable fair-value estimates to determine goodwill impairments. Standard setters suggest managers will use the discretion given by such estimates to convey private information on future cash flows, while agency theory predicts managers will use the discretion opportunistically. We test these alternative hypotheses using a sample of firms with market indications of goodwill impairment (firms with book goodwill and two successive years of book-to-market ratios above one). We find non-impairment of goodwill is increasing in firm characteristics predicted to be associated with greater managerial discretion. We also find evidence that the discretion is being used in a manner consistent with agency-based predictions. The evidence does not confirm managerial discretion is being used to convey private information.